A new high for the stock market?

Commentary: Many segments of the market are at all-time highs

It wasn’t that many weeks ago when only the lunatic fringe were even willing to ask this question. But, thanks to a stock market rally that keeps chugging along — and a Dow winning streak that now stretches to seven straight sessions — and even otherwise sober investors are beginning to wonder.

Believe it or not, though, a large number of stocks, perhaps even a majority of them, are already above where they stood at the stock market’s all-time high in October 2007.

Few are even aware of this, however, since the widely-followed market indexes, such as the Dow Jones Industrial Average
DJIA, -1.11%
and the S&P 500 index
SPX, -0.88%
remain around 15% below their all-time highs.

But it turns out that those market benchmarks are dominated by the very largest of companies. And the market’s performance in recent years has been quite segmented, with the largest-cap stocks being one of the worst-performing of all the major sectors.

Consider the performance of the various benchmarks calculated by Wilshire Associates, the index provider. From Oct. 9, 2007, the date of the stock market’s all-time high, until earlier this week, the Wilshire U.S. Large Cap Index lost more than 8%. In contrast, Wilshire’s U.S. Mid-Cap and U.S. Small-Cap indices are each more than 8% higher than their respective October 2007 highs.Read story on mid-cap stocks’ new high

This bifurcated market is perhaps even better illustrated by focusing on two other Wilshire indices. Consider first the Wilshire 5000 index, which represents the combined value of all publicly traded stocks in the U.S. It is more than 6% below its October 2007 high, after taking dividends into account. However, if you take away the 500 largest stocks, the index would be 4.3% higher.

If indeed the broad market averages were soon to join the mid-cap and small-cap indices in new-high territory, it would mean that the overall stock market in two years’ time had overcome the 2007-2009 bear market.

Though that might strike you as an extraordinarily fast recovery, it actually is quite in line with historical norms. Consider, for example, the recovery time from the mother of all bear markets — the one from the 1929 stock market high to the 1932 low, in which the Dow lost some 90%. According to Wharton finance professor Jeremy Siegel, the inflation-adjusted total return index of the U.S. stock market was in late 1936 and early 1937 just as high as it was at its pre-crash peak in 1929.

That recovery, in other words, was achieved in “just” four and one-half years from the market’s mid-1932 low.

Historians often exaggerate how long the market has taken to recover from past bear markets because they focus on narrow market averages and ignore factors like dividends. The Dow, for example, didn’t battle back to its 1929 high until 1954, 25 years later — suggesting to the unsuspecting that it took more than two decades for the stock market to recover from the 1929 Crash and subsequent bear market. That’s just wrong.

None of this discussion means that the broad market averages will soon surpass their October 2007 all-time highs, of course. But a proper reading of history does suggest that entertaining that possibility isn’t as preposterous as it might otherwise seem.

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